Doha, Qatar National Bank (QNB) attributed the continued stagnation of the global industrial sector to three main factors, which are: demand imbalances resulting from unusual patterns in consumer behavior, the negative shock to supply chains resulting from the RussoUkrainian conflict, in addition to the Chinese economic deceleration.
QNB’s report said that the Covid-pandemic and unprecedented policy stimulus measures boosted manufacturing activity above trend levels. With lock-downs and social distancing measures, a temporary change in consumer behavior and spending patterns away from services led to an exceptional global demand for physical goods.
The report added that by the end of the pandemic, with the normalization of economic policies and activities, manufacturing began to weaken, and the outlook gradually started to turn gloomy as the demand for services recovered. This was well reflected in the pattern of global trade volumes, which track closely the evolution of manufacturing activity.
Importa
ntly, manufacturing weakness has been transpiring across all the major economies for several months. The recent data releases show that manufacturing has been contracting in the US, China, and the Euro Area, with particularly negative conditions in the latter, where activity indicators suggest a deep contraction.
The report mentioned that the demand imbalances built by unusual consumer behavior after the pandemic shock led to the recent period of protracted weakness in manufacturing activity. The demand for goods, such as electronics, cars, real estate and home building equipment was “pulled forward,” as their utility increased during lockdowns. However, the end of the pandemic created a surge in “repressed” service spending, and a re-balancing of the previous consumption trends. Moreover, given the “pulling forward” of the consumption of goods during the pandemic, there is naturally an extensive period of weaker demand.
The report considered that the supply shock created by the RussoUkrainian conflict has
been particularly negative for European manufacturing. Lower energy availability at higher prices weigh on industrial competitiveness, particularly of the most exposed countries, such as Germany. In the Euro Area, the latest releases show that industrial production is 4% below its peak of December 2021.
In Germany, structural headwinds such as high taxation, labor shortages, and lack of investment in infrastructure have compounded with the energy crisis to create a sharp manufacturing downturn. In fact, industrial production in Germany never recovered to its pre-pandemic levels: it is currently 7.4% below the level of February 2020, and maintains a downward trend that started in 2017.
On the other hand, the economic deceleration of China is weakening its role as a world growth engine, and this is especially relevant for manufacturing. During the four decades of 1980-2019, economic growth in China averaged 9.5% per year, but the pace over the last two years has been much weaker, with growth of 3% last year a
nd around 5.5% expected for this year.
The strength of the Chinese economy is important for global manufacturing, given its influence through supply chain linkages, the appetite for imported commodities, and a growing influence in investment flows across China-influenced emerging markets.
Trade linkages with China, for example, are vital for many other emerging markets and specially in Southeast Asia, but also for some advanced economies in Europe, such as Germany, France, and the Netherlands. Given the importance of the Chinese economy, its slowdown implied an important headwind for global manufacturing in recent months.
Source: Qatar News Agency